Capital Insights with Jack Kern

I have been engaged in conversations with a variety of people very familiar with the New York metropolitan real estate market and they’re worried. Rightfully so, it seems as New York and the surrounding employment corridors are about to make history again, this time for job loss. Our estimates for the Manhattan-Northern New Jersey-Connecticut region show a loss of over 155,000 jobs, and for the first time, a very probable spike in apartment vacancies. The unemployment rate will probably vacillate between 5.8% and 6.8% (you know I think the household survey is inaccurate, but they get the trend right) and the economic engine that is New York will show little strength throughout next year. Apartment vacancies, at least in investment grade, professionally managed buildings could hit 9%, and concessions and genuine rent decreases could be in the offing. For those of you unfamiliar with New York area rental real estate, there are really two kinds of rentals – longer term, fairly entrenched owners who like 2 and 3 year leases, and then market rate, change every year apartment stock. While New York has some rent controlled units and rent increases are controlled by the rent stabilization board, for the most part, rents have not, and may not actually increase as much as allowed because of this really dramatic job loss. A lot of long term apartments are now coming off of 2 and 3 year leases and it remains to be seen if owners have any pricing power left.

For the long run, New York is seeing stresses. With the dissolution of some of the bright lights in investment banking and finance gone, effectively adding millions of square feet of sublease office space, there is no singular industry sector in the region taking their place. Consolidation and reorganizations will ultimately guarantee that Manhattan and the surrounding corridors are going to lose their jobs pretty consistently across northern NJ and NYC, and it will affect all of the ancilliary businesses that trade with these failing firms.

It may very well turn out that Frank Sinatra was wrong. If you want to "Wake up in a city that never sleeps," you might try Seattle, because for now, New York is down for the count.—